When homeowners are considering applying for a home equity line of credit, it's important that they first make a rough calculation of what they can afford. In order to do this, homeowners need to start with some general figures and calculate what the monthly payments will be. Before you can do this though, you first have to know how home equity line of credit payments work and how to calculate them.
One of the benefits of a home equity line of credit (or HELOC as they're often called) is that you don't have to pay any of the principal during the draw period; you only have to pay the interest that was accrued during that month. This is a major advantage of HELOCs, but it's also one of the most intimidating for homeowners. Because HELOCs usually come with a variable rate, the interest owed will be different each month, and homeowners think it's far too complicated to calculate. The good news is, that it's not!
Before you start calculating what your HELOC payments will be, you first need to know the principal amount of the loan and what your annual percentage is (this you can obtain from your lender). Start by dividing your annual percentage by 1200 to calculate the interest rate you'll pay. If your annual percentage is 4.04%, divide that number by 1200 and you get 0.003 % - that's your monthly interest rate. Once you have this number, you can then simply multiply that by your principal amount to determine the amount of interest you'll pay. So if you have an annual percentage of 4.04% and you borrowed $10,000 from your HELOC, the amount of interest you would owe in a month would be $33.66. That might be the total amount you pay in one month, as that's all that will be due; but you could also lower your interest monthly payments by lowering your principal amount.
Although it's not required that you make any payments on the principal each month, doing so will also lower the interest payments you make each month. Because the interest is determined as a percentage of the principal amount, when you make principal payments, you automatically lower the amount of the loan. If you want to pay equal payments on the principal each month, you just need to divide the principal amount by the term of the line of credit. So if your line of credit is for $10,000 and it's extended over a period of three years, you simply divide $10,000 by 36 (months) and your monthly principal payment is $277.77.
It's also important to understand that once the draw period ends, the period where the homeowner is only making interest payments, the amortization period will begin. This amortization period will use the owner's credit liability and use it over the remaining term of the loan. During the amortization period, both principal payments and interest payments will need to be made and so, the homeowner may need to recalculate the monthly payments on their home equity line of credit at that time.